Clean Harbors, Inc. (CLH) Earnings Call Transcript & Summary

And you say you don't have it in your guide and your outlook. At what point are you going to see enough evidence that gives you some confidence to talk a little bit more -- in a little bit more detail about it?

It's up to the EPA to kind of give us a clear guidance as to what -- how clean is. And I think that when that happens, we'll be able to talk more about it.

Okay. On the SKSS business, I lost track of how many quarters the margins came in better than expected. What -- what are the puts and takes at this point when we see the volatility in oil prices? We've seen base oil prices come down. You've talked about being able to manage the spread better, so as your competitor in this market. Is this really a structural change that you're seeing in the market?

IMO 2020 was real, and you kind of lost that. We talked about that for 2 or 3 years in advance of IMO 2020. When it came, it came the same time as COVID hit, so you kind of lost that. But I'm of the view that IMO 2020 is real and is permanent.

Yes. And you may want to just -- not everybody is completely aware of that. But you may want to just touch on what it is?

Jim, can you take that question real quick?

Sure. So those that don't know the IMO 2020 [indiscernible] change the amount of sulfur that [indiscernible]. And there's a lot of ways about the core in the U.S. [indiscernible] we are very good at the wafer.

So Jim, in terms of that IMO 2020. There was certainly a lot of noise in that initially because we had COVID. But as you guys have had the opportunity to really peel away things, it's your sense that from what you're seeing in the market that there clearly has been some benefit that's coming. I mean we saw in base oil prices were -- we're seeing oil prices increase, you guys were paying presumably, I think, less than what you would have normally paid going back a number of years. Is that fair to say?

Yes. And for those that, again, are less familiar with us, we manage our waste oil collection business that we then turn it back into a finished product that we sell back into the marketplace. That finished product that we sell, we compete with the majors who are making base oil from refining crude oil. And so we can't control the price on the back end. It's a commoditized market. And so we're selling against Chevron, Motiva, et cetera. So how we keep our spread and we keep our profitability where we want to be is to manage the front end. And that's why IMO 2020 was such a game changer for us because that front end of the spread where we go out and try to get waste oil to feed our plants in the best possible price. It eliminated some -- a significant amount of outlets where that oil was going and as a result, there was a lot of waste oil available in the market for us to go get. There's probably actually some impact on the back end and -- but it's a lot harder to measure. But those boats now have to carry compliant fuel. And so they're using more valuable molecules, if you will, than they were previously. So there's probably some incremental impact. The problem is IMO 2020 was -- they had until March 1 of 2020 to start implementing and then COVID hit. And as you know, the cruise ships all stopped, the tankers were kind of floating outside of the U.S. ports for a while. And so all that ocean-going traffic really kind of crawled. And as we know, the -- even the container ships were stalled for a long time. So it was sort of everyone expected to be the supply shock where there wasn't enough compliant fuel. And in fact, when it came into being was exactly when no one was looking for compliant fuel.

So we're in a period now where potentially a more normalized environment for the business. Oil prices are going to be -- are going to clearly be volatile. But people are driving a lot more certainly than they work during COVID. Is this a more normalized year where you'll be able to step back and see really what -- how the business can perform even with the volatility in the way?

And that's the question that Mike and I get all the time is sort of what is normal because clearly you've had some benefits. The Ukraine-Russia conflict, upset the global markets. We've had some weather issues previously with the deep freeze. And so the market has really never been able to get back to normal. And we only make base oil out of our plant. So when you're a refiner, you've got all different cuts of the barrel. And so there's been diesel shortages. We've all read those headlines of 27 days of inventory and people are flying more, especially now that China is reopening and so there's jet fuel shortage concerns. So when you're making all these different cuts of the cow that a traditional refiner is making, base oil is -- takes the -- requires the most processing. And so it's been short run in some of those allocations, if you will. And so we could see that continuing. And so I think this year will give us a good look at sort of what is normal. Because obviously, last summer where diesel went to $7 and crack spreads are kind of crazy, it certainly impacted the base oil market.

And the other development, and it does seem like there's been movement in a guys have priced at a discount, right, with your product. So walk us through what's happening in the market, maybe some of the conversations you're having that lead you to believe that this is now a different environment for your product that you...

Sure. If you went back to sort of refining over the last 10, 20, 30 years, it was sort of a less than -- seen as a less than process. It was a lot of just filtering and the base oil that was produced out of re-refineries not as good as what was coming out of crude. You fast forward to probably 10, 15 years ago, it was equal and where we think the industry has now come is that it's better than what's coming out of crude because what we're taking in has already been process. It's -- it's a large amount of synthetics today in motor oil. And so our feedstock is terrific compared to what it used to be. And so we've gotten to the point now where we've sort of eliminated that discount because anyone that's into technical specifications of base oil know that what we produce is good or better. And then you take that to its logical conclusion of, okay, well, it's better, are people willing to pay for the better? They haven't been, but they were not getting a discount anymore. What we see as the future is what we're making a 78% smaller carbon footprint. And so are people willing to pay for that. Those are the discussions we're starting to have now where people are kind of running out of ESG ideas and here's an easy one. You take motor oil made from crude out of your fleet, you put in what's made from re-refined and you've just lowered your footprint significantly.

Is there the potential that we could see some news on that front this year? Or are these -- is this going to be just very gradual?

No. Well, I don't want to promise this year, but I think there will be -- there are significant players that are looking to do something in this space. And so whether that's an announcement of something with us or we just start signing up some larger customers, I think we're going to start to see momentum this year.

Okay. There have been some pressures in the business, even though you've clearly been showing generating pretty healthy margins, but there have been some supply chain issues in this business as well. Where do you see that in terms of some of the shortages, some of the additives and...

Yes. The additive shortages were significant this past year. It forced us to create less blended, but some of that was just a crazy weather that struck one of the key suppliers to the U.S. domestic market that they got flooded in the summer and we don't see that happening again. And that supply has started to normalize, and we also had some hydrogen shortages at one of our plants, and we've created a process now where that wouldn't happen again and repeat again. So we think this year will be in terms of our production at our plants and growing our blended will be back. And that will help if there is a step back in the spread that would help offset that.

And the company continues to -- you've done acquisitions, paid down debt. You've been buying stock back at different periods of time. How do we think about overall capital allocation, certainly, the investment related to Kimball? But just in general, how should we think about capital allocation?

Yes, we talk -- we show if anyone seen our slide deck kind of those 4 buckets, internal investments. We're certainly continuing with that. This year will be the big year of investment for Kimball. It will be -- we'll still come out with a number when we announce, but somewhere in the $80 million to $90 million range. So fairly significant investment there. We are looking at some other internal projects to do more of that buyback. So we've been exercising a program for the past 5-plus years that has been very successful, and we still got over $100 million in that. So we still think we're undervalued today, and we're going to continue with that program. On the debt side, we hadn't been paying down, but obviously, rates are rising and we've got a refinancing that we're going to have to do at some point in the next first half of this year for debt that's in 2024, so we may take out some of the debt as part of that refinancing. And then M&A, we're approaching 70 acquisitions in our history. So that's always been part of who we are. Didn't do too much in 2022, but we had the big HydroChem acquisition to integrate and consume and also we turned down a lot of deals. We don't necessarily talk about those or get credit for those, but we kick the tires on a lot of things and just because we're #1 in so many markets, we're the natural buyer. So we'll continue to look at a lot of deals, whether or not we execute a lot of deals, but that's certainly going to be part of our growth strategy and capital allocation going forward.

How do you weigh the opportunities on the M&A front? Because of the size of the company now, obviously, it takes a fair amount of movement needle. But what considerations are going into...

Well, we really look for things that will bring us unique assets or permitted facilities or permitted locations because our strategy, if you look at our history of acquisitions is not to buy a book of business. We have such a great network and such a national footprint that if we can plug someone's -- even a small acquisition, that they may not be routing a lot of volume through a permitted site. We take over that site and we ramp it up considerably. And we've had great success with some of those smaller acquisitions that may not move the needle per se, but they actually, from a return perspective, are excellent acquisitions.

Is there any -- I would assume valuations are still pretty high as there be that...

Yes. We talked to one of your lead bankers today, and we were talking about the environment, and he was saying that maybe we're going to get back to a world where strategics are the right purchasers because there's been so much easy money and cheap money that you've had private equity and others kind of overpaying for deals. And maybe that's finally coming to a close, which I think would be great for companies like us.

Yes. You've had targets out there in the past, you're pretty -- you're over that $5 billion threshold. And maybe it's an Investor Day coming up, but is there any way to think about how you -- how we should be thinking about the company in terms of longer-term targets given where you are today?

I think that's one of the motivations behind the Investor Day. So I can't front-run what we're going to present there. And I think it was at the last Investor Day 9 years ago or 10 years ago, whatever it was, that we sort of established that $5 million and $1 billion. And so maybe it took us a little longer than we thought at that time to get there. But here we are, and we're ready for the next stage of growth under Mike and Eric's leadership.

The -- I'm just going to open it up. Anybody have any questions out in the audience? Question? Okay. So you've been through different economic cycles. You sound like you guys are -- from what you're seeing, how concerning is it for you? You've been through different cycles, this -- whether this is going to be a mild downturn or whatnot? Do you feel you're just coming into this in much better position than in prior cycles? And in the past, you guys haven't been affected that much?

yes, I think -- I think, yes, I think that we have a nice backlog, we have a nice pipeline. I think we're in a really good shape as we kind of get ready for 2023. And again, I think that the organization is kind of well structured. And the good news is that if there is problems and there could very well be problems. I mean we're aggressive on costs. We're going to take our cost out, we'll close. We'll do what we need to do. And we have, for the past 42 years. I don't think that changes with kind of new leadership. So if the answer -- if there is a downturn and it is substantive, and we'll take out costs. We get smaller. And we're not afraid to do that. We have a good operation in India, and that's kind of a low-cost jurisdiction and we continue to make investments in that area and lower head count in North America.

Okay. Well, with that, we're going to wind it up. Mike, thank you.

Good luck, guys.

Jim, thanks.

Thanks a lot, Jim.